Protecting Your Real Estate Commissions

From time to time, even the best, most experienced real estate brokers, encounter real estate commission disputes. Disagreements over commissions have many forms, for example: (1) when a client prematurely “cancels” the listing; (2) when a client “cancels” a purchase contract; (3) when a client allows the property to proceed to foreclosure; or (4) when a client decides he doesn’t want to pay the full amount of the commission. When situations like these arise, the broker must decide whether to extend grace and hope to preserve the relationship with the client, or, to seek payment for their commission.

As a threshold matter, before a broker can even consider whether a commission is owed, the broker must first confirm that a proper listing agreement or employment agreement exists. Importantly, to protect their right to a commission, brokers must ensure that their listing agreement is in writing and includes the mandatory provisions mandated by A.R.S. §32-2151.02 (e.g., terms of broker compensation; definite duration or expiration date; signed by all parties). If no written employment exists, the Courts will generally balk at a broker’s claim for a commission. Indeed, because brokers are authorized to practice law to a limited degree per the Arizona Constitution, Article 26, Section 1, brokers are held to the highest standard of care and Courts will hold brokers to that standard when considering whether they complied with the statutory requirements for employment agreements. See Morley v. J. Pagel Realty and Ins., 27 Ariz.App. 62 (1976) (those who have the right to prepare all instruments incident to the sale of real property bear the responsibility and duty of explaining to the persons involved the implications of those documents); see also Olson v. Neale, 116 Ariz. 522 (1977) (if a real estate broker can practice law in the area of real property sales, it is reasonable to hold him to a full understanding of the implications and ramifications of the Statute of Frauds).

Fortunately for brokers, because listing contracts are drafted by brokers and their attorneys, most contain a liquidated damages clause that requires the seller to pay the full commission if the seller: (1) cancels the listing; (2) cancels the purchase contract; or (3) allows the property to foreclose. The Arizona Court of Appeals upheld such liquidated damages clauses in Focus Point Properties, LLC v. Cleo Johnson, 1 CA-CD 12-0766 (June 2014). In Cleo, the seller signed a listing contract with Focus Point Properties, LLC and its broker (collectively, the “Broker”) for a one-year listing with a liquidated damages clause. Specifically, the listing contract provided that “The same amount of sale or rental commission shall be due and payable to broker, if without the consent of broker, the premises is withdrawn from this listing, or otherwise withdrawn from sale or rental or rented, transferred, or conveyed by owner.” The listing contract further provided that “If completion of a sale or rental is prevented by default of owner, or with the consent of owner, the entire sale or rental commission as appropriate shall be paid to broker by owner.”

About six months into the listing, the seller canceled the listing. The Broker then sent the seller a demand for $140,000.00 based on the above liquidated damages clause. The seller refused to pay the commission, and the Broker filed a lawsuit for breach of contract and other claims. The seller counterclaimed for fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, and damages under Arizona vulnerable adult statute.

The case ultimately proceeded to trial and the jury found in favor of the Broker and awarded the full commission, attorney fees, and punitive damages.

The Court of Appeals also upheld the award of attorneys’ fees to the Broker pursuant to the listing agreement’s attorney fee provision and awarded the Broker attorneys’ fees incurred regarding the appeal.

Knowing when to turn the other cheek and preserve the relationship and when to stand your ground and demand a commission is often a difficult decision. But following Focus Point Properties v. Cleo Johnson and the Court’s approval of listing agreements’ liquidated damages clauses, brokers may find peace of mind knowing that they have strong remedies available to them if their client cancels a listing or backs out of a purchase contract.

If you or someone you know has questions regarding a commission dispute or any other real estate matter, call or email Mr. Charles today to schedule an appointment today.

Christopher J. Charles is the Founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). He also serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at chris@providentlawyers.com or at 480-388-3343.